Sometimes the cure is worse than the ill: an occasional look into the life of LSE DESTIN 2010

Good and Bad Practices in Microfinance: Lessons from Benin

By Fiorenzo Conte and Gareth Davies (special thanks to Anna Custers for feedback)

We thought about summing up what we think should be the Dos and Don’ts for any financial consortium financing microfinance institutes (MFIs) in developing countries.

1. Track the progress. If you want to track how the money is being used and how well (financially) the project is doing you should insist on regular reporting. However, make sure to agree upon the definition of the indicators used. So if you want to know the loan portfolio – i.e. the number of active loans at the end of the year – make clear it should not include the interest on the capital. Make also sure that the same definition is used by the other donors of your partner. You do not want to have a situation whereby the local MFI is compiling data mixing up definitions by different donors. Which it brings us to the following point:

2. Standardize and streamline financial reporting. Financial consortium should standardize the report that they require. So you would have a fund of international consortiums financing MFIs operating in West Africa, which agree upon indicators. Local MFIs would ask for funding to the fund and compile one financial report with unique indicators for the fund. Remember: MFIs often do not have the time and resources to compile different data for different indicators for different donors.

3. Adopt a total transparency approach with the local partner. One way this could be happening is a) through internet-based management information system (MIS) which is accessible by the funder, and b) a periodic handover of the full MIS database. Both of these solutions rely on MIS technology. Although not always possible, this is a key driver to transparency, thereby control, thereby non-corrupt practices. As it is not feasible for funders to have agents controlling all their partners all the time, they must be prepared to invest in technology (and the training required) to act as a replacement. Alternatively, this is the sort of common ground where social enterprise and development funds can work together, the former bringing the commercial skills and practices, and the latter providing the technology infrastructure to reach into the country.

4. Do not just throw money. If the local partner is having troubles to have the loans paid back it might ask you for a new loan to “re-launch the activities’. Often, however, it is just about finding money to keep the office open. In this case think twice. You do not want to cause your partner to shut down operations, but throwing money at them to recover your initial loan won’t fix the problem: it will probably make it worse. That is how many developing countries have piled up debts and became highly indebted. It is probably not in your interest to have your partner MFI highly indebted. Also, try to ensure that your partner MFIs do not go to another donor. Again, it would only pile up debt, and in the end this will be in your disadvantage.

5. Set your goal. Ask yourself what the ultimate goal of your action is. Is it to break even or to gain a margin that can be reinvested in other projects? Is it to expand access to credit to poor people or to have an impact on their standards of living through credit? If the last option is your target you should probably still think to be financially sustainable, but you should probably somehow evaluate the impact on your clients. The manager of the local partner told me that the project has been in place for 5 years and he has not seen any observable change in the community. The evaluation of any small change that your project causes can be very supportive. Otherwise your only goal becomes to move money around the world and you end up writing on your website that the results achieved is an outstanding portfolio of 23 million Euro and the collaboration with 125 local partners in developing countries. But these are inputs: think about the outputs too.

Gareth is currently in Benin working in microfinance and next year he will go to London Business School to pursue an MBA.